Addressing Carbon Leakage by Border Adjustment Measures: Review of Current Studies

Carbon leakage and international competitiveness are two policy concerns related to the asymmetric domestic climate policies as a result of the implementation of the Kyoto Protocol. Among other policy alternatives, the use of offsetting measures at the border to level the playing field is getting popular in policy debates. Climate change related border adjustment measures (BAM) are aimed at restoring international competitiveness through internalising the carbon cost globally, combating carbon leakage, enabling wider and deeper emission cuts domestically and incentivising other countries to join international efforts to cut emissions.
The purpose of this report is to review current analyses on BAMs focusing on four aspects: (i) the scale of competitiveness impact and carbon leakage; (ii) the pros and cons of different BAMs; (iii) economic analyses of the effectiveness of BAMs; and (v) WTO compatibility of BAMs. This report can be used by national policy makers who propose for or against using trade measures for domestic climate policy-making. It is also expected to reach the academia by stocktaking of the state of the art and sharpening major issues around BAMs for further discussion.